Summary: In this article, find out if new construction homes are a good investment or not. Also, learn about the benefits and drawbacks of investing in new construction homes and more…
New construction homes can be a great investment–especially for landlords looking to avoid the ongoing maintenance and repairs that inherently come with older homes. The main goal for real estate investors is to find a property that produces a decent return on their investment (ROI).
An easy way to determine if an investment will be profitable is to look at the Cap Rate (aka Capitalization Rate). The Cap Rate will tell you the amount of money coming in from rents and the amount of money going out (aka rental income minus expenses).
New construction investment property, in an up-and-coming area, with high rental demand can produce excellent returns. Keep reading to learn about the benefits and drawbacks of investing in new construction rental properties and whether this strategy is right for you.
What is New Construction?
When you purchase a new construction income property you are buying a brand new home, typically directly from a builder or developer.
Buying new real estate comes with some unique advantages and drawbacks. As always, performing extensive due diligence is a really important step before making any investing decisions. It’s a good idea to check out the developer’s past projects and how those properties have appreciated or held their value over time.
10 Benefits of Buying New Construction Investment Property
#1 – Location!
Anybody who knows anything about real estate knows that it’s all about location and new builds are no exception. New construction homes are typically found in new or upcoming markets. These new developments are usually built in or around “A” -neighborhoods. Nicer neighborhoods bring better schools, lower crime rates, access to well-kept parks and closer proximity to amenities.
Because new construction developments are often located in good neighborhoods (or soon-to-be good neighborhoods), landlords should have an easier time finding high-quality tenants.
#2 – People Like Living in New Homes
As humans, we have an incredible ability to adapt to our surroundings. For instance, a creaky ceiling fan might drive you crazy at first, but over time you don’t even notice it.
Because we can get used to our surroundings, we also tend to get bored quickly. Most of us like shiny, new things. Why do you think so many people choose to lease their vehicles? The thrill of cruising down the street in a brand new car every two or three years outweighs the cost for a lot of people. When that “new car feeling” wears off, they can start picking out their next car to lease and begin the cycle all over again.
New construction homes feel cleaner, often provide open floor plans and can offer better natural sunlight. Plus, knowing that you are the first person to live in a space and make it entirely your own is both appealing and comforting. In fact, more than half of American’s prefer new homes over existing ones.
A huge benefit of investing in new construction property is that people are always going to be driven by novelty.
#3 – Appreciation & Instant Equity
New construction homes are a good strategy for investors looking for growth. Investing in new and emerging markets can increase your property’s appreciation rate and build equity faster. Appreciation is never a guarantee so make sure you perform a competitive market analysis before buying. However, if you know the market is growing and there is high rental demand then you can feel confident about your property appreciating.
My friend recently purchased a new construction investment property. In just three months, the value of her property has increased $60k! Talk about buying in a fast-growing market with incredibly high demand for rental housing!
#4 – Extended Warranties & New Appliances
Another benefit of new construction rental properties is they come with brand new appliances and extended warranties on all major systems. Electrical, plumbing, heating and A/C, and major structural components, should all be covered under an extended warranty (warranty lengths vary). If anything breaks or goes wrong, the factory warranty should cover it.
With new houses, investors won’t have to worry about as many surprise expenses–at least for several years.
#5 – Low or No Maintenance & Repairs
For the less-handy landlord, properties requiring little or no maintenance may be an enticing proposition. New construction real estate investors avoid most or all of the maintenance and repair issues that often come with older homes.
The need for any major repairs, like a leaky roof or plumbing issues, wouldn’t even be on the radar of new construction investors.
#6 – Ability to Customize To Cut Costs
New construction homes are designed to appeal to what’s popular right now. So investors won’t need to spend time or money on making any updates. Buying pre-construction homes (homes that haven’t been built yet) gives you the ability to customize the property inside and out. This allows you to cut costs by opting for durable, basic features and amenities rather than upgraded or luxury alternatives.
With existing homes, unless a major remodel is planned, what you see is what you get. Older homes are naturally going to come with unique features and aesthetics, depending on what was in-style at the time it was built. Updating even a few of the outdated aesthetics will likely be quite costly.
Right now, most renters and homebuyers are looking for open floor plans, big rooms and vaulted ceilings. A housing trend we’re seeing with the COVID-19 pandemic is that outdoor space is also becoming a “must-have”.
#7 – Smaller Deposits Upfront
New construction homes can usually be reserved for very little money. Pre-construction homes can also be reserved before they are fully built.
For example, let’s say a developer requires an initial deposit of $1,500 in earnest money to reserve a new construction townhome valued at $225,000. You, the buyer, don’t have to pay any additional money until the property’s closing date. This keeps money in your pocket for longer and if the market forecast changes and you need to pull out of the deal, it won’t hurt as much financially.
#8 – Buy New Construction Now or Plan Ahead
Investing in new and pre-construction real estate provides more control over your buying process and timeline. When you buy a newly built property, the builder should be able to provide a firm closing date upfront. The same goes for a pre-construction investment property.
This can be extremely advantageous for investors looking to buy right away or plan ahead for future investments. You’ll also avoid potential bidding wars on existing homes for sale, especially if it’s a competitive buyer’s market.
#9 – Work With the Builder’s Team to Expedite Buying Process
Developers and builders will almost always have a team of professionals they prefer to work with during the selling process. Think about using your builder’s mortgage and title companies, appraisers, etc. Sometimes you can even get a discount by working with their people because of the long-standing relationships they’ve made. Utilizing your builder’s team can help ensure a smooth and expedited buying process.
#10 – “Smart & Healthy” Technology
Compared to resale property, new construction homes provide far more advanced technology and energy-efficiency. The materials used to build new homes are more durable and long-lasting than ever before.
Advances in technology have improved the efficiency of windows, insulation, and heating and air conditioning systems. These advances create a healthier living environment and have made energy-efficient homes an industry standard. And because new builds are energy efficient, your tenants will save on their utility bills every month.
6 Drawbacks of Buying New Construction Investment Property
#1 – Longer Commute / Location
New and emerging markets commonly pop up just outside of existing neighborhoods. Many major cities in the U.S. are already densely populated and developers have nowhere to build except outward. As such, new construction neighborhoods are often located farther away from city and town centers. A longer commute and less proximity to convenient amenities can present big drawbacks for both investors and renters.
#2 – New Construction Homes are More Expensive
When you buy something new, whether it’s a car, lawnmower, or table saw, it’s going to be more expensive than if you bought used. Because new construction is built with new materials, when you buy a new house you’ll be paying retail market value for everything. For an investor to buy anything at market value is not an ideal start to an investment–so this could dissuade many away from buying new homes.
Keep in mind that the trade-off for money is time. A new property is more expensive than a resale. But a resale property often requires more ongoing maintenance and frequent repairs, which takes money out of the investor’s pocket. Real estate investors prefer different strategies, so it’s up to you to determine what is right for you.
#3 – Give Up the Charm
It’s impossible to recreate the look and feel of older neighborhoods. If you’ve ever walked the sidewalks beneath 100-year old trees lining the streets, you know the feeling of nostalgia I’m talking about.
For the most part, new builds are located in newer areas–not older, established neighborhoods. These newer neighborhoods and homes lack the charm many people look for.
#4 – New Homes Can Be Generic
New homes in planned communities often look alike. It can be difficult to differentiate one street from the next. It’s pretty much the same “cookie-cutter” houses painted in slightly different colors. Renters looking for more character and charm won’t find new builds all that appealing.
#5 – Lack of History
Newly built homes don’t have a history of past expenses, so it’s more difficult for investors to accurately run the numbers to see if the investment will be profitable. Certain unknowns, like property taxes, that come with a new build may be seen as a disadvantage.
#6 – Sometimes a Waiting Game
Housing supply and demand vary from market to market. Finding and buying a newly built investment property can sometimes take awhile, especially if demand is high and supply is low. What if there aren’t any finished new construction homes for sale right now? Investors may end up waiting several months until they can actually close on the completed property.
With the huge lack of affordable housing across the U.S., investing in new construction homes presents a unique opportunity. If you can find a new build in a growing market where there isn’t a lot of new construction, you’ll be able to offer something that other landlords can’t: a brand new home.
If you want to learn more about new construction investment opportunities, join the network (it’s free!) and attend our virtual live event happening all month.